Fraport Stock Price is at Decade Lows and Getting Interesting
Fraport stock overview – ETR: FRA
This Fraport stock analysis is part of my global airports stocks list with detailed stock by stock analyses.
A look at Fraport’s stock historical price chart shows that, apart from the dividends, the management didn’t really create shareholder value over the last 20 years which is something peculiar given the staggering growth of air travel over the period thanks to the booming low-cost carriers and intercontinental traffic.
In this Fraport stock analysis we will:
Give an overview of Fraport’s business with COVID-19 impact analysis
Make a fundamental analysis of the Fraport stock and valuation
Discuss Fraport’s dividend and potential
Create an investment risk and reward thesis based on current circumstances and fundamentals.
Here is the video analysis of why investing in airport stocks might be smart now and Fraport’s stock video discussion. Written analysis continues below.
Fraport stock analysis – business overview with COVID-19 impact analysis
Fraport is an airport operator that manages many airports but the crown jewel is the Frankfurt airport that contributed 60% of revenues in 2019.
The key airport, Frankfurt, is owned 100% and has no time terms on the concession. The only other airport 100% owned and without time limits is Ljubljana in Slovenia while the Xi’an airport is only 24.5% owned. Given the long-term concessions and the fact that Frankfurt is key, we are going to use stable earnings projections and not adjust for concession expiries at this moment in the analysis.
Given that 90% of revenues are traffic related, the situation doesn’t look good respective to the COVID-19 crisis.
Even after savings on costs, likely yearly costs will be above 1.5 billion EUR. Just the Frankfurt airport is likely to cost the company around 100 million EUR per month. If that is 60% of the maintaining costs, we can expect Fraport to burn through more than 140 million EUR per month if the crisis persists. Given the situation in Brazil, USA, some parts of Europe, we can’t expect revenues to stabilize in 2020.
The company had planned big investments, but there will be delays there, even if minimal from a CAPEX perspective with savings of just 200 million on 1.4 billion. (always take the less conservative estimation in such projections)
The above, with or without COVID shows how the company is focused on increasing operations in Latin America, Greece and adding a terminal to Frankfurt. High capital investments come at a cost and require growth to happen in a certain time frame to be feasible.
The issue with Fraport is that it has significant amounts of debt, 5.6 billion EUR. However, the debt has a ridiculous interest rate of 2.3%, so the maintenance costs are only 128 million EUR per year.
Thus, the main concern are the cold running costs of approximately 1.5 billion per year. Given the current liquidity position of more than 2 billion EUR, it is likely Fraport can survive 2020 in the same form it is now and continue to invest in their capital projects.
Fraport stock analysis – business overview – strategy
Fraport’s strategy is similar to all other airport or air travel related industry and based on the increased demand for travel thanks to globalization and middle-class growth.
As discussed, they are heavily investing in Frankfurt, Brazil, Lima and Greece.
So, as with all other airports, it depends on when will the situation return to normal and when will the international travel megatrend that all related industries are focusing on, resume its growth path. Apart from the COVID-19 uncertainty, the risk is that when the capital projects are completed, that there isn’t the hoped increase in traffic for what the projects were built. Such a situation would increase costs and actually lower profits in place of increasing them. If growth is slower than what the management expects, returns on capital will be smaller than expected and thus shareholders will not be rewarded as expected. If their timing was wrong in the past too, that might explain the small investment return over the last 20 years.
Only time will give us that answer, but let’s assume that in 2021 things will already improve and make a fundamental analysis with relative normality going forward.
Fraport stock fundamental analysis and valuation
I will make this fundamental stock analysis assuming things return to normal one day and the market gives Fraport stock a fair valuation where the dividend is also reinstated.
The company has been growing revenues at a good pace over the last 5 years, consequently earnings grew too and they also increased the dividend.
Book value has been increased over the years which is a good sign that shareholder value has been created. An owner would care about book value while a stock investor cares about whether the expectations baked in the stock price are met.
The negative free cash flows over the last few years are a consequence of high capital spending for growth. Once the spending stabilizes and things return to normal, we can expect high levels of cash flows as the operating cash flows almost reached 1 billion EUR in 2019. If we assume 400 million EUR of maintenance capital investments, the company could have free cash flow levels of 600 million EUR. Deduct the 128 million in interest costs and we are down to 500 million. The current market capitalization is 3.79 billion EUR and in a good year, the free cash flow yield would be 13% which is not bad.
The current stock price is slightly below book value which doesn’t yet give a margin of safety because if the company burns through a billion over 2020, the book value will decline fast.
Fraport dividend and outlook
As shown above, the company has been a steady dividend payer over the years where the dividend range was from 1.23 EUR per share to the highest level proposed for 2019 of 2 EUR. The dividend now has been revoked but in good times, investors can expect a dividend of 2 EUR again which would give a yield of 5% on the current price.
If things improve and Fraport’s investment cycle is finished, they could easily push the dividend to 4 EUR per share as that would require approximately 372 million EUR which is a level that can be achieved thanks to the high operating cash flows. On the current stock price, that would imply a yield on cost of around 10%.
Fraport stock investment strategy and outlook
What the company needs as a catalyst is actual real growth in passenger numbers. For example, to acquire the Ljubljana airport, Fraport paid 234 million EUR in 2014 and they are investing at the moment to enlarge and modernise the terminal. However, total revenue of the Ljubljana airport was 45 million in 2019 and EBITDA 16 million and traffic actually declined already in 2018. If I deduct interest of let’s say 5 million given the 2.3% rate on the price paid, 5 million of depreciation, taxes, the Ljubljana airport doesn’t make a profit, not even in good times. So, what would be necessary is a boom in traffic across the globe to significantly push Fraport’s earnings and dividend higher.
Without significant growth in traffic, which is something I don’t expect to happen fast in Europe, especially now with the COVID-19 crisis, the best investors can hope for is a return to normalcy and a 5% dividend yield, that can go to 10% if the investment cycle is ended and the investments actually pay off thanks to more traffic.
If we assume the investment cycle is finished and things return to normal by 2025 without a significant increase in debt due to COVID-19, Fraport could be paying a 4 EUR dividend which would likely give it a 100 EUR stock price for a 4% yield which is the approximate norm in Europe. A stock price of 100 in 2025 would imply a 20% yearly return and if 100 is reached in 2030, then a we are looking at a 10% yearly return. It all depends on the timing on the COVID-19 recovery and the actual continuation in global air traffic growth.
I am worried about another thing, I have analysed the Vienna Airport stock and they too are expanding and even thinking of adding a runway. I will still look at Zurich Airport stock but I assume the story will be the same as all three airports aim to be a global hub for transfers.
On the positive side, I drove my kid to day care today and saw two planes in the blue skies😉 Not much, but a good sign. In any case, given the decline in stock prices, airport stocks are interesting to watch at the moment.
I love to research businesses and the respective stocks. My goal is to research a few hundred of them each year and then hopefully find a few good investments. The only way to do that is to turn as many stones as possible and follow the interesting businesses closely. I am happy to share the research process here and I hope you enjoyed this and the other stock analyses published here.
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